What's Behind Lululemon's Quality Complaints?

The Associated Press has filed a report this weekend, delving into some complaints that have come up repeatedly on lululemon athletica's (NASDAQ: LULU  ) discussion boards. Customers have complained that the company's earlier sheerness issue has not been totally resolved and that there is a new issue with some products pilling -- a buildup of those little rice-looking bits of fabric where clothes rub against things. Is this going to be a repeat of the company's previous debacle or are we looking at something less substantial?


Source: Lululemon.

Lululemon's issue at issue
This problem first reared its head in early 2013, when Lululemon announced that it was recalling pants made of its luon material. The company had found that the quality of the fabric had declined, and that when it was stretched, it became sheer. For pants meant to be worn during yoga -- which is, let's say, 90% stretching -- this was bad news. The company dropped its head of product development, took the hit on sales, and by the middle of the year, seemed back on track.

The new report is based on consumer interactions on a Lululemon-managed forum. In a series of back-and-forths, consumers have come out of the woodwork to claim that they can detect a fall in the quality of Lululemon's revived luon. Claims range from sheerness issues to fraying to pilling, with few customers coming to the company's defense.

How widespread is the problem?
While Lululemon has acknowledged receiving the feedback, it has yet to make any big statement. The Wall Street Journal spoke to Lululemon and the company said that the product issues were believed to be isolated and that concerns did not speak to a larger issue. Right now, there's no way to know for sure, but I think Lululemon is going to be OK, this time.

The chain of complaint messages is running over 100 entries, with consumers' sentiment ranging between outraged and forgiving. In fact, many of the messages praise the company's clothing, outlook, and history, but take issue with one product. To me, that's not the sign of impending doom.

In my view, Lululemon's biggest problem is that it has yet to fully satisfy its customers after the first quality issue. Now, some consumers are looking more closely and feeling less inclined to forgive any misstep. What the AP piece picked up on is really less about quality issues and more about brand issues.

The branding problem
Lululemon has had a year of mistakes, including the early quality issues, the rotating leadership challenges, and recently, some horrible PR. The company has yet to give itself enough breathing room to let customers fall back in love with it, and it hasn't been able to wow consumers for the whole of 2013.

That branding issue -- along with Luon supply problems -- has put a strain on Lululemon's margins, and gross margin fell in the company's last quarter. Given the current market sentiment, I expect that trend will continue. The solution is in management stability and a return to quality. Lululemon needs a solid season of good products, rereleased old favorites, and a new charismatic CEO to replace Christine Day. That's going to take time, though, so I don't expect great things from Lululemon's stock just yet, pilling or not.

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